Powell Appears Before Congress, Beige Book Released, Fed Nominations Still Frozen
US Federal Reserve Chairman Jay Powell testified by the House Financial Services Committee and the Senate Banking Committee this week. Powell performed to the market’s liking and provided great stability for the upcoming meeting, all but assuring a 25 bps hike will occur in the coming weeks. He mentioned a key consideration of the committee will be how and how much to shrink its burgeoning balance sheet by. Of course, Powell was asked about the escalating conflict in Ukraine. He said this would of course be considered by the committee, but that generally their focus and dedication to curbing inflation is still the top priority.
He was asked whether we may see a wage-price spiral. He responded that this was a key concern and it is monitored carefully. He said he would be moving forward with lift-off despite geopolitical concerns for this reason. A nimble approach was required given the escalating situation in Ukraine, said Powell. It is notable that Fed Future markets had been predicting a 50 bps hike, but that has since reversed.
In a notable exchange, Powell said that the Central Bank should have moved earlier to pull back its pandemic-related accommodative posture in hindsight. He told members of the Senate Banking Committee that pro-liquidity policies along with longer-than-expected supply-chain issues were the primary causes of inflation. He also mentioned that he was dedicated to doing whatever is required, even if it hurt economic growth, in order to get inflation under control. He specifically said he admired Paul Volcker and would take extraordinary actions as he did in the 1980s (the last time inflation was this high) if that is what proced necessary to achieve price stability.
The Fed released its Beige Book this week. This useful document takes data from across the 12 regional Federal Reserve banks to provide useful economic insights. The economic effects of Omicron seemed to hold back some businesses and consumer spending but economic growth still proceeded at a modest to moderate pace. There was disruptions from the millions of workers who called in sick, and some of the worst winter weather of the year occurred over the period observed as well. The extremely tight labor market weighed on many companies as well, some are choosing to turn to automation as a result.
Increasing labor costs and material costs are being passed through to consumers in many cases. Many companies expect to continue passing input costs to their customers over the next few months. Companies across all districts are raising wages to meet the demands of a very tight labor market. There has been some movement to the downside in economic growth projections and the uncertainty associated with Europe’s first major ground war in decades will make the already difficult task of post-pandemic lift-off even more fraught with risk.
Cleveland Fed President Loretta Mester came out and said that the Ukraine war has upped inflationary pressure and, therefore, the Fed should be more hawkish. Specifically, she said greater rate hikes could be required if the inflationary pressure associated with the war continues to increase. Charles Evans of the Chicago Fed also called for hawkish actions, saying the Fed should raise to 2% this year, which would imply as many as 7 rate hikes.
The Biden administration’s Federal Reserve nominees are still being held up by Republicans because of their concerns with nominee Sarah Bloom Raskin. She was Maryland’s Banking Commissioner and was also a former Federal Reserve board member. However, her comments about using the supervisory process to penalize energy companies and her ties to a Fintech company called Reserve Trust have led Republican members to boycott all nominees. A boycott in the Senate means they simply do not show up for the votes. They say they need more info from Ms. Bloom Raskin on her time at Reserve Trust. Powell’s own nomination is being held up as well. The tapering of monthly purchases of $80 bn of Treasuries and $40 bn of MBS began in November and was accelerated in December. The Fed is on track to taper down to no more asset purchases by its March meeting, but still has around $30 bn in securities to purchase. The Fed will be done with asset purchases in mid-March 2022 at this pace. The benchmark yield on the 10-Year Yield collapsed as Russia-Ukraine violence escalated and closed at 1.74%
